Download AS DRUG PRICE SCRUTINY RISES, PRESSURE BUILDS TO

SPRING 2016
www.bdo.com
THE NEWSLETTER OF THE BDO TECHNOLOGY & LIFE SCIENCES PRACTICE
DID YOU KNOW...
Moody’s recently lowered
its expectations for global
pharmaceutical industry growth to
3-4 percent, adjusted down from
its previously announced outlook of
4-5 percent.
In 2015, 35 percent of the 170 total
IPOs were in the biotech sector,
according to Renaissance Capital.
In January 2016, no companies went
public—in any industry.
AS DRUG PRICE SCRUTINY
RISES, PRESSURE BUILDS TO
DEFINE VALUE
The $160 billion deal between
Allergan and Pfizer announced in
November 2015 is the largest merger
in the pharmaceutical sector on
record, according to Bloomberg.
An interview between Ryan Starkes, partner and leader of the BDO Life Sciences Practice, and
Dr. David Friend, Chief Transformation Officer at The BDO Center for Healthcare Excellence
& Innovation
Drug pricing is one of today’s most
hotly debated and deeply complex
topics, influencing and being
influenced by the healthcare and
pharmaceutical industries’ paradigm
shift from fee-for-service to valuebased care and reimbursement.
This shift in how the system pays for
drugs and patient care has enormous
ramifications on business models across
the entire healthcare industry, including
biotech companies, big pharma and drug
manufacturers. In this Q&A, Ryan Starkes
sits down with his colleague Dr. David
Friend, who advises both drug developers
and healthcare providers on pricing, quality
measurement metrics and validation, to dig
into the roots of the drug pricing issue and
how the market is changing.
Mr. Starkes: Drug companies are under
attack for what is seen as exorbitant
pricing on new drugs, or for raising prices
dramatically on drugs that have been in
the market a while. Why are we seeing this
scrutiny now?
Dr. Friend: The heart of the drug pricing
debate centers on value. Warren Buffet has
a favorite phrase: “Price is what you pay,
and value is what you get.” Looking at price
in isolation doesn’t give you the full story
Read more 
The U.S. Food and Drug
Administration’s Center for Drug
Evaluation and Research approved
45 novel drugs in 2015, up from 41
in 2014 and 27 in 2013. This was
the highest number of approvals in
19 years.
Research from Gartner suggests
that process improvements and data
standards could save the life sciences
industry between $5.8 to $6.6
billion annually.
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BDO LIFE SCIENCES LETTER
CONTINUED FROM PAGE 1
DRUG PRICE SCRUTINY
on a drug’s value. But until now, there has
really been no market pressure for drug
manufacturers to demonstrate their value or
for physicians to prescribe medications based
on value.
While it’s standard practice in practically
every other industry, this explicit tying of a
payment to an outcome is new in healthcare,
prompted in part by unsustainable costs,
the Affordable Care Act and other factors.
We’re seeing drug manufacturers in the
news as part of a much bigger conversation
about healthcare pricing. And we have the
added “Edward Snowden” effect of Martin
Shkreli who, if inadvertently, brought
attention to what has always been publicly
visible, but never really discussed: How do
we price? The opaque system has provided
significant opportunity for many participants
to maximize their profits. With as much
sunlight as is now on this, organizations
must understand and explain their pricing
strategies much better.
That’s going to have a significant impact
on health businesses’ earnings power going
forward. So, it’s incumbent upon everyone
in the space who invests, who works in the
companies, who has any kind of financial
interest, to understand these changes in both
the pricing and reimbursement landscapes.
Mr. Starkes: How does the changing
healthcare reimbursement environment
relate to drug pricing?
Dr. Friend: The healthcare system is moving
more aggressively toward reimbursing
healthcare providers based on their
performance. The Center for Medicare &
Medicaid Services (CMS), which is one
of the system’s biggest payers, spending
trillions of dollars, is setting the tone. Their
objective is to drive healthcare costs down
and improve the quality of care, which is
leading to more standardized care and a focus
on best practices. How does this play out
with prescription drugs? If there is a “best
drug” for an illness, it’s more likely that it will
be favored by CMS and other commercial
insurance payers, and less effective drugs
won’t be reimbursed.
This shift toward performance, or valuebased payments, has an enormous impact
on pricing across the entire healthcare
spectrum. Drug manufacturers must be able
to justify why they are charging more than
other competitors for certain drugs in order
to stand up to the scrutiny coming from
multiple directions. How does a drug perform
against competitors? What value will payers
and consumers put on that difference? How
can you get a significant and fair return for
shareholders? There is not going to be as
much room for second best, mostly because
no one ever took the time before to measure
what was best and validate why.
Mr. Starkes: How are organizations
attempting to measure value?
Dr. Friend: There’s no scale that says what’s
best, or what’s value. It’s still a debate up for
grabs. We think there’s a lot of opportunity
for organizations to think about the value
propositions they bring. Value is determined
by a variety of players—consumers,
institutions that manage and produce care,
drug manufacturers, investors—and their
points of view are constantly evolving.
One of the many ways to think about value
is through outcomes. Consider hepatitis
medications, which have come under
scrutiny for their expense. Let’s say a patient
is charged $100,000. That’s an extremely
high price, but what if the pill permanently
cures hepatitis? Society might otherwise
spend $1 million or more for that patient’s
treatment over their lifetime. In that context,
is $100,000 a good value?
What about the value of a drug that
minimizes side effects, or is easier to
administer? The FDA already has a
very involved process to validate drug
effectiveness and safety. How will drug
manufacturers further validate that their
product has greater value than another
product to justify its price?
It’s a challenge to everybody along the
healthcare supply chain because you have
to get it right. Your premise for your price is
becoming contingent on what you’re saying
the outcome is, and those outcomes can be
looked at retrospectively by authorities. If
you say, “Our drug should command a higher
price because the readmission rate is lower,”
someone will be able to verify that and
hold you to it. We’re seeing more and more
enterprises demanding specific performance
guarantees from their vendors and penalizing
them when they’re not met.
Organizations are going to have to
continuously monitor performance to prove
their value as new competitors enter the
market, and to justify their costs as regulators
and others compare their performance claims
with outcomes. Measurement will have to
be built into the core business and into the
economics of pricing. The finance group will
likely be tasked with not only measuring and
monitoring financial data, but clinical data as
well. As dollar payments become explicitly
linked to clinical reported outcomes, there
will also be a need for someone within
organizations to verify the accuracy of the
clinical data.
And measurement, again, takes us
directly back to business value. If your
product creates a lot of value and you can
demonstrate that, you should be thinking
about how to get a significant and fair return
for your shareholders. That may mean that
your prices should in fact increase. On the
other hand, if your product is really not
as good as your competitor’s, it may not
be enough to lower the price. You may be
excluded entirely from the network. If I make
the cheapest jet engines out there but they
catch fire every couple of hours, Boeing is
never going to put my product on their plane.
Mr. Starkes: Many drug providers attribute
costs to research and development. How
will these new pricing factors impact
drug innovation?
Dr. Friend: We are really in a golden age of
science as far as our ability to create new
medications, but it’s extremely expensive to
do so, and we believe that roughly 9 out of 10
products that are attempted, fail. Investors
need to be able to get a sufficient return to
absorb nine failures for that one success.
Pricing, then, is also a function of how much
innovation we want as a society. The more
the market is willing to pay for drugs, the
more money there is to put toward taking
risks to innovate. U.S. citizens are paying
higher prices than anyone else in the world
for medications because we’re paying for
Read more 
BDO LIFE SCIENCES LETTER
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DRUG PRICE SCRUTINY
innovation that benefits the rest of the world.
How much are we willing to pay? How do
companies recoup the investment they made
across 10 products to get one successful one?
One lever we can pull is price; another is
patent length.
THE FIGHT AGAINST BRIBERY IN
PHARMA: WHAT YOU NEED TO
KNOW NOW
By Ryan Starkes, Glenn Pomerantz and Nina Gross
Mr. Starkes: Are investors comfortable with
such a high level of risk taking, given the
current environment?
Dr. Friend: There is still tremendous
opportunity in healthcare and life sciences.
However, it’s absolutely critical for investors
to understand what’s happening with pricing
and reimbursement, because they are central
to driving earnings. Over the next 10 years,
there will be around $10 trillion of value
created in healthcare, but $4 trillion will
also be destroyed. Investors on the winning
end will be those with a much better handle
on pricing.
Smart investors have to evaluate the value
proposition that a company brings. If a
company can generate superior outcomes,
it needs to be able to tell that story in an
economic way and in a clinical way to
justify their price and generate shareholder
returns. On the other hand, there must be an
understanding of how companies respond to
having products lower down the value-chain
profile—will the price of the drug be lowered?
Will the company only charge people for
whom the drug was effective?
New questions will be introduced in
healthcare and life sciences in coming
years that are common in other industries
but which haven’t been asked of these
sectors before.
This Q&A originally appeared in the BDO Knows Healthcare
blog. The original post can be viewed here.
Dr. David Friend is a Managing Director
and Chief Transformation Officer for
The BDO Center for Healthcare
Excellence & Innovation. He can be reached at
[email protected].
Ryan Starkes is the Life Sciences
practice leader for BDO’s Technology
& Life Sciences Practice. He can be
reached at [email protected].
Over the past several years, the
pharmaceutical industry has become
subject to heightened attention in
the face of the U.S. government’s
prosecution against global bribery
and corruption.
their anti-corruption probes of multinational
pharmaceutical giants, also targeting
AstraZeneca and Novartis, among others. The
recent success of cross-border investigations
will likely lead to even greater cross-border
cooperation and information sharing by
regulatory authorities.
Under the Foreign Corruption Practices Act
(FCPA), U.S. authorities have investigated and
subsequently charged some of the largest
multinational pharmaceutical companies
with international bribery violations,
including Pfizer, Eli Lilly and Johnson &
Johnson, to name a few. Just last month,
SciClone Pharmaceuticals agreed to pay $12
million to settle FCPA charges.
In the United States, both the Department
of Justice (DOJ) and Securities and Exchange
Commission (SEC) have made clear their
intentions to target FCPA violations in the
pharmaceutical industry. Most recently, the
SEC outlined its intentions to aggressively
pursue pharma FCPA violations in a March
2015 speech, highlighting three areas of
misconduct that most frequently arise in
bribery investigations. The SEC is zeroing
in on “pay-to-prescribe” bribes, in which
informal payments are made to healthcare
professionals of government or stateowned companies in exchange for their
recommendation of a specific medication
or medical device. A second form of bribery
that commonly arises is incentives to include
a company’s products on a formulary or
approved device list. The third and final form
of bribery the SEC cited is paying bribes
It isn’t just the U.S. government cracking
down on big pharma, however. Under the
Bribery Act of 2010, the U.K.’s Serious Fraud
Office (SFO) has initiated actions against the
pharmaceutical sector. For example, in May
2014, the SFO launched a formal criminal
investigation into the commercial practices
of GlaxoSmithKline following cases of alleged
bribery in other jurisdictions, including China.
Chinese authorities, too, have escalated
Read more 
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BRIBERY IN PHARMA
under the guise of charitable giving. The
lesson, according to the SEC, “…is that bribes
come in many shapes and sizes.”
The DOJ has indicated its intent to probe
the pharmaceutical industry for possible
FCPA violations as far back as 2009. At the
10th Annual Pharmaceutical Regulatory and
Compliance Congress and Best Practices
Forum, DOJ Assistant Attorney General
Lanny A. Breuer stated that, “One area of
criminal enforcement that will be a focus
for the Criminal Division in the months and
years ahead [is] the application of the Foreign
Corrupt Practices Act…to the pharmaceutical
industry,” citing, among other things,
the significant overseas sales generated
in countries with government-operated
health systems.
SINGLING OUT PHARMA
Why are U.S. and international regulators
singling out pharma? Historically, once the
SEC successfully brings an enforcement
action against a company, it can apply a
similar approach when prosecuting other
targets in the same industry to expedite
a favorable outcome. The SEC netted
multibillion dollar settlements for bribery
charges against Pfizer and Eli Lilly in 2012,
and pharma has remained in its crosshairs
since then.
Secondly, the growing concern around
international bribery allegations is an
indication that more companies in the sector
have expanded their operations in emerging
markets. As pharmaceutical companies grow
their international business, they confront
less established regulatory environments and
different rules for how business interactions
are conducted and reported. These
inconsistencies from market to market create
confusion over what constitutes a bribe,
resulting in both accidental and purposeful
misconduct.
Pharma, perhaps more than any other
industry, is at risk of FCPA bribery charges
stemming from sales to foreign government
officials. As stated by the DOJ, “Nearly
every aspect of the approval, manufacture,
import, export, pricing, sale and marketing
of a drug product in a foreign country will
involve a ‘foreign official’ within the meaning
of the FCPA.” The industry is built on close
interactions with third parties such as
physicians, nurses, hospital administrators
and even pharmacists, who are considered
government employees under the FCPA and
most other anti-bribery laws. These third
parties are typically less knowledgeable
of—and in many cases, completely blind
to—their anti-bribery compliance obligations.
Combining rapid growth in emerging markets
with the extent of third-party interactions,
the pharmaceutical industry only increases
its risk of exposure to corrupt behavior. For
example, SciClone Pharmaceuticals was
found in violation of the FCPA for providing
money and gifts to Chinese officials
(including employees of state-owned
hospitals) in order to boost sales.
The fines and penalties levied against a
company found in violation of anti-bribery
laws can be severe, wreaking havoc on the
company’s finances and ability to continue
to do business in those countries. In
addition, the legal, forensic accounting and
compliance fees associated with a bribery
investigation, and subsequent third-party
monitoring in some cases, can often exceed
the costs of the actual bribe. Finally, the longterm reputational costs may be the most
damaging. The initial financial penalty doesn’t
fully account for the loss of consumer trust
and the negative view toward the company
and its leadership, nor does it account for the
potential for shareholder lawsuits.
Pharma is not the only industry facing
increased scrutiny, as the SEC expands into
other life sciences arenas. In 2012, Biomet,
a medical device company headquartered
in the United States and operating globally,
entered into a Deferred Prosecution
Agreement (DPA) with the DOJ and SEC.
Biomet was charged with paying bribes to
government doctors in Argentina, Brazil
and China. Biomet agreed to pay a $17.28
million criminal penalty to the DOJ and
disgorgement of profits totaling $5.4 million.
Additionally, Biomet was required to have
a compliance monitor in place for a threeyear term. In March 2015, the DOJ extended
Biomet’s DPA and required monitorship
for an additional year after uncovering
misconduct in additional countries.
The cost of violation of anti-bribery laws
is not only significant for companies, but
can also have severe consequences for
company officers, directors and employees.
In September 2015, the DOJ issued the
“Yates Memo,” calling for increased focus on
individual accountability in both criminal and
civil corporate wrongdoing. Although most
FCPA enforcement actions have not resulted
in charges against company employees,
the Yates Memo serves as a reminder to
executives and employees that compliance
is both a company issue and an individual
responsibility. Additionally, it sets the stage
for the more aggressive prosecution of
individual perpetrators, encouraging broader
civil enforcement and raising the threshold
on what constitutes cooperation credit when
negotiating a DPA. Continuing the theme
of the Yates memo, in February 2016, the
DOJ announced that as part of entering
into settlement agreements, companies
will be required to sign certifications stating
they have disclosed all information about
individuals involved in wrongdoing.
BUILDING A COMPLIANT
ORGANIZATION
In this environment, compliance can’t be
an afterthought; it needs to be viewed as a
key business driver and an integral piece of
strategy and risk management. Companies
that establish a culture of compliance from
the top down will be in the best position to
mitigate risk. Without active participation
and leadership from management as well
as the board, compliance programs won’t
permeate the DNA of the organization, and
violations may occur. Management needs to
design, implement and test company policies
and procedures, as well as ensure the right
controls and compliance resources are in
place to prevent, deter and detect fraud and
corruption. The process should start with a
fraud and corruption risk assessment either
as a standalone or as part of an Enterprise
Risk Management (ERM) process, culminating
in timely monitoring of adherence to policies,
procedures and the compliance program in
general. The board’s oversight responsibility
cannot be overstated. Directors should
understand the fraud and corruption risks,
confirm that appropriate risk assessments
have been conducted, know the gaps and
remediation plan and be confident that
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BDO LIFE SCIENCES LETTER
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BRIBERY IN PHARMA
an appropriate monitoring mechanism is
in place.
Companies must also be vigilant in
conducting due diligence for their acquisition
targets. In an extremely competitive
market such as pharmaceuticals, M&A is
frequently used for strategic advantage
but may also lead to inheriting legal and
regulatory problems after the deal closes.
Acquiring a company means acquiring its
potential fraud and corruption problems.
Organizations should conduct extensive, riskbased anti-corruption due diligence before
finalizing an acquisition and factor the risk
of fraud and corruption into the purchase
price and indemnities. Additionally, after a
deal is completed the acquirer should take
steps to integrate its compliance culture
and ensure all parties are operating on the
same wavelength.
Unfortunately, compliance is not a one-sizefits-all solution. Every company — big or
small, public or private — needs to identify
and measure its unique fraud and corruption
risks, link those risks to existing controls,
identify gaps, perform cost-benefit analysis
on possible remediation measures, remediate
and monitor.
As bribery and corruption investigations
continue to rock the pharmaceutical industry,
all of healthcare has been placed under a
microscope. The Department of Justice is
extending its focus beyond drug companies
to medical devices, clinical trials and a
number of other health-related industries.
Expect authorities in the U.S. and abroad
to leverage their insights from prosecuting
Big Pharma to target the broader healthcare
ecosystem.
FDA ISSUES NEW CYBERSECURITY
GUIDELINES FOR MEDICAL
DEVICE MANUFACTURERS
By Shahryar Shaghaghi and Ryan Starkes
Following a spate of major data
breaches—resulting in over 112
million compromised health records
in 2015 alone—healthcare is the
latest industry to face heightened
regulatory scrutiny of its cyber
preparedness.
The U.S. Food and Drug Administration
(FDA) and Department of Health and
Human Services (HHS) are both moving
forward with initiatives this year aimed at
improving cybersecurity efforts within the
healthcare industry.
HHS is more broadly focused on
the healthcare industry at large. The
Cybersecurity Act of 2015, a provision of the
omnibus spending bill passed in December,
requires HHS to submit a report to Congress
assessing the preparedness of the healthcare
industry in responding to cyber threats within
the next year, with the goal of establishing a
“single, voluntary, national, health-specific
cybersecurity framework.” A cybersecurity
task force comprised of regulatory agencies,
industry stakeholders and cyber experts
will help to inform their recommendations
on developing a centralized intelligencesharing system on cybersecurity threats and
protections for networked medical devices
and electronic health records.
Nina Gross leads BDO’s Global Forensics
practice in Washington, D.C. She can be
reached at [email protected].
The FDA is focusing its attention on medical
device manufacturers and, in January
2016, issued new post-market guidance
for the management of cybersecurity in
medical devices.
Glenn Pomerantz leads BDO’s Global
Forensics practice. He can be reached
at [email protected].
Elements of Successful Cybersecurity
Management in Medical Devices
Ryan Starkes is the Life Sciences
practice leader for BDO’s Technology
& Life Sciences Practice. He can be
reached at rstarkes@bdo,com.
The FDA guidance encourages a proactive
risk-based approach to managing post-market
cybersecurity vulnerabilities. Ongoing risk
assessment and monitoring, routine device
cyber maintenance and implementation
of necessary actions to mitigate device
functionality and patient safety risks are
key to “good cyber hygiene.” The agency is
also promoting information and intelligence
sharing (a key provision of the Cybersecurity
Act of 2015) within the medical device
community. “Voluntary” participation in an
Information Sharing Analysis Organization
(ISAO) is considered a critical component of a
manufacturer’s proactive cyber strategy and
is considered a mitigating circumstance when
an issue arises.
The FDA calls for manufacturers to adopt
a comprehensive cybersecurity risk
management program and documented
process for identifying hazardous cyber
vulnerabilities in line with the National
Institute of Standards and Technology
Framework for Improving Critical
Infrastructure Cybersecurity, which includes
the core principles of “Identify, Protect,
Detect, Respond and Recover.” Such a
program should include:
uMonitoring cybersecurity information
sources for identification and detection of
cybersecurity vulnerabilities and risk
uUnderstanding, assessing and detecting
presence and impact of a vulnerability
u Establishing and communicating processes
for vulnerability intake and handling
uClearly defining essential clinical
performance to develop mitigations that
protect, respond and recover from the
cybersecurity risk
uAdopting a coordinated vulnerability
disclosure policy and practice
uDeploying mitigations that address
cybersecurity risk early and prior to
exploitation
Manufacturers should assess potential cyber
risks tied to the device’s “essential clinical
performance,” evaluating the exploitability
of the cybersecurity vulnerability and the
severity of the potential health impact to
patients.
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CYBERSECURITY GUIDELINES
In instances where the “essential clinical
performance” of a device could be
compromised, the manufacturer is required
to notify the agency. Reporting requirements
are not enforced if the following
circumstances are met:
in mitigating cyber risk. Participation in
ISAOs or Information Sharing and Analysis
Centers (ISACs) will likely remain voluntary
in the near term; however, as exemplified by
the FDA, regulatory entities will increasingly
consider participation when assessing cyber
preparedness.
uNo known serious adverse effects or
deaths associated with the vulnerability;
uThe manufacturer sufficiently remediates
the issue within 30 days of learning of the
vulnerability; and
uThe manufacturer is a participant of
an ISAO.
A device with an unacceptable level of risk
to its essential clinical performance may
be considered in violation of the Federal
Food, Drug & Cosmetics Act and subject to
enforcement actions.
PROTECTING THE LARGER
ECOSYSTEM
Medical device manufacturers are only the
first line of defense in managing cybersecurity
threats. The FDA stresses that medical device
cybersecurity is a shared responsibility
between all healthcare stakeholders including
healthcare facilities, patients and providers.
While manufacturers are ultimately
responsible for identifying and remediating
potential cyber vulnerabilities associated
with their medical devices, hospitals and
healthcare systems must safeguard their
networks from potential breaches of security
via medical devices.
The domino effect of a healthcare data
breach sheds light on the importance of
information sharing, a growing area of
focus in cyber strategy and policy. The
Cybersecurity Information Sharing Act
(CISA), also part of the omnibus spending
bill, offers prescriptive advice on furthering
collaboration between the government
and private sector, as well as industry
collaboration within the private sector.
While we will likely see an uptick in threat
intelligence sharing across all industries,
concerns about protecting competitive
information and privacy risk have yet to be
addressed. The level of sharing remains to
be seen and will dictate the effectiveness of
ISAOs and other information sharing systems
Cybersecurity threats will continue to
evolve and become more sophisticated,
and the stakes will grow higher for device
manufacturers that are unprepared.
Establishing a solid cybersecurity
management framework and an ongoing
process for evaluating emerging threats is not
only critical as a protective measure but as a
requirement for business growth.
CYBER PREPAREDNESS
What can medical device manufacturers do
to prepare?
Start at the drawing board: Make sure to
incorporate cybersecurity considerations
throughout the product lifecycle, including
the design and development phases. The
extent to which the device is connected
to the Internet or other electronic data
interfaces determines its vulnerability to
potential attack. Security functionalities
should include limited access and multiauthentication factors, as well as a system to
detect and respond to intrusions. However,
manufacturers need to carefully balance
implementing the necessary security controls
and safeguards with device usability.
Implement early detection protocols:
A variety of systems and technologies,
including artificial intelligence, machine
learning and probabilistic mathematics, are
already in use in other industries to identify
malware and intrusions that have gained
access to IT systems. Device manufacturers
can contain these infiltrators by identifying
them early on and preventing them from
accessing what they want to access.
Identify your sensitive data: As medical
devices are increasingly networked to
facilitate patient care, a breach of data
could compromise device functionality and
inadvertently cause patient injury or even
death. When evaluating the risk to essential
clinical performance, manufacturers should
assess both the exploitability of the cyber
vulnerability and the severity impact to
health. A binary assessment of the degree
of risk posed by a vulnerability is critical
to prioritization and establishing effective
compensating controls.
If you do get attacked:
uIsolate the affected systems before the
point of no return.
uInform your customer base and other
parties in your network. Hackers may be
using medical devices as a gateway to
attacking another healthcare player in the
system.
uProtect patient financial data as well
as their medical data from future
cyber attacks.
uIf the attack has serious adverse
health consequences, remediate the
vulnerabilities to reduce risk to an
acceptable level. If an official fix is
not immediately feasible, provide
a workaround or temporary fix in
the interim.
uWork to identify the source of the
issues and learn from potential and
actual breaches.
Shahryar Shaghaghi is National
Practice Leader for BDO’s Technology
Advisory practice. He can be reached at
[email protected].
Ryan Starkes is the Life Sciences
practice leader for BDO’s Technology
& Life Sciences Practice. He can be
reached at rstarkes@bdo,com.
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BDO LIFE SCIENCES LETTER
7
PErspective in LIFE SCIENCES
By Lee Duran and Aftab Jamil
While biotech
stocks took a hit at
the end of last year,
2015 was an alltime record year for
pharmaceutical and biotech M&A
following a strong 2014.
Some 166 deals were announced,
compared with 137 in 2014, with a total
deal value of over $300 billion, up from
$250 billion in 2014, according to The
Pharma Letter. There were 30 deals
valued at over $1 billion, up from 26 in
2014 and 20 in 2013.
Despite the feeding frenzy, PE firms have
tended to stay clear of pharmaceutical
and biotech companies, with the
exception of established generic drug
makers, which offer a more reliable source
of revenue. Fundamentals in the industry
remain strong, but intense scrutiny
around the rising costs of prescription
drugs has made some investors skittish
about even the biggest pharmaceutical
giants. Early-stage biotech companies—
while appealing to strategic investors
that need to boost their drugs offerings
as older patents run out—are too risky for
many PE investors, who are less willing to
place bets on pre-revenue companies in a
volatile market.
Instead, pharmaceutical outsourcing
services providers, supply chain
management services providers, and
contract research organizations have
been profitable areas of focus for PE
firms. Great Point Partners recently sold
Cytovance—a manufacturer of proteins
and antibodies to be used in clinical
trials—for $205.7 million, representing
a return of 7.4 times the original
investment, The Wall Street Journal
reports. The over-the-counter segment,
which includes vitamins, minerals
and supplements, is also attractive
for PE investors, thanks to its low
reimbursement risk, according to a Bain
Capital report.
During the first three quarters of last
year, the biotech IPO market was
also booming, with over 200 launches
since 2011, and 127 in the three-year
period from 2013 to 2015, according to
Dealogic and Dow Jones VentureSource.
In the second half of last year, a glut
of early-stage companies with no
commercially-approved products
receiving high valuations pointed toward
a bubble—which some say burst last July.
Additionally, the drug pricing controversy
that erupted in September prompted a
months-long sell-off of biotech stocks.
The Nasdaq Biotechnology Index dropped
more than 20 percent by the end of 2015
amid the broader bear market, and the
decline has persisted into the new year.
As a result, the funding environment
seems to be cooling, with only four
biotech launches so far this year—a sharp
reduction, according to The Wall Street
Journal. A number of biotech firms are
scheduled to go public this year, but many
may not make it due to poor earnings
and the ongoing stock market selloff, the
Financial Times reports.
The first launches of the year were seen
as a litmus test of the sector’s current
fund-raising abilities, according to
the Financial Times. Chinese biotech
company BeiGene, a developer of novel
cancer treatments, listed on Nasdaq
in early February, raising $158 million,
and saw its shares jump 17 percent to
value the company at $854 million. But
other stocks have fared poorly, due in
part to drug failures. The fact that many
biotech firms have products still under
development makes it very difficult for
investors to determine the potential
success of a given firm. Pricing issues are
further stressing investors, raising new
questions about how companies can
justify the cost of their drugs and the
value they offer to the marketplace.
Venture capital investment in the life
sciences sector is second only to the
software industry. U.S. biotech venture
funding reached a record $8.7 billion
in 2015, up from $7.06 billion in 2014,
according to data from Evaluate Pharma.
Average rounds rose to $24.1 million,
with the top 10 percent accounting for 19
percent of total funds raised. However,
deal numbers were down, with capital
flowing to a smaller number of firms that
barely beat the all-time low, according to
FierceBiotech. For now, VC interest in the
sector remains strong, but 2016 may see
a reduction in crossover deals as nontraditional investors pull back following
the stock market slide, FierceBiotech
reports.
PErspective in Life Sciences is a feature examining private
equity investment in the life sciences and biotechnology
sector.
Sources: The Pharma Letter, Wall Street Journal, Bain
Capital, Financial Times, FierceBiotech, Dealogic, Dow
Jones VentureSource, MarketWatch, BioPharmaDive,
MoneyShow.com
Lee Duran is the National Leader for
BDO’s Private Equity and Venture
Capital Practice. He can be reached at
[email protected].
Aftab Jamil is the leader of BDO’s
Technology & Life Sciences Practice.
He can be reached at [email protected].
Read more 
8
BDO LIFE SCIENCES LETTER
CHANGES TO R&D TAX CREDIT CREATE MORE
OPPORTUNITIES TO SAVE THAN EVER BEFORE
By Chris Bard, Chai Hoang, & Nina Medina
Recent changes to the research and
development (R&D) tax credit create
new opportunities—regardless of
whether a business is currently
paying regular income tax or the
alternative minimum tax (AMT). The
Protecting Americans from Tax Hikes
Act of 2015 (PATH Act), signed into
law in December, included three
significant benefits for life sciences
businesses of all sizes.
PERMANENT R&D TAX CREDIT
– effective Jan. 1, 2015
The federal research credit is intended to
encourage businesses to invest more in U.S.
development activity. For the same reason,
more than 35 other countries provide similar,
sometimes even more generous, benefits,
e.g., Japan. Not surprisingly, then, many
businesses tend to locate and remain in these
innovation-friendly countries: 75 percent of
the companies listed on the Thomson Reuters
2015 Top 100 Global Innovators list are based
in either the U.S. or Japan.
Time will tell if the PATH Act will increase
the U.S.’s share of global innovators, but
its conversion of the R&D credit from a
temporary provision of the Internal Revenue
Code to a permanent one should help. For
the first time since 1981, when the credit was
enacted, businesses can take the positive
financial benefit of the credit into greater
account when planning and budgeting for
future years’ growth and spending. The
new permanency of the credit strengthens
its initial intent — to foster innovation and
economic growth. The permanent extension
of the credit provides a particular advantage
to life sciences companies, which often
face significant financial uncertainty and
instability, as their stock performance and
revenues often depend on the unpredictable
outcome of drug development. It further
helps mitigate the financial risks involved
in new drug discovery and development,
providing a reliable tax benefit that makes
financial forecasting more simple, more
stable and more predictable.
Newer and smaller life sciences companies, in
particular, will also benefit from the certainty
that the R&D credit will be available once
they become taxable—a potentially critical
factor for reinvestment in development
activities and continued growth. And
until they do become taxable, the PATH
Act provides two additional benefits for
such companies.
CREDIT ALLOWED AGAINST
AMT FOR ELIGIBLE SMALL
BUSINESSES –
effective Jan. 1, 2016
Many small businesses—especially earlystage pharmas and biotechs—find themselves
subject to the AMT. Generally though, prior
to the passage of the PATH Act, the R&D
credit could not be used to offset AMT. As a
result, many of the exact type of companies
the credit was intended to incentivize were
often not able to use it.
The PATH Act changes that. Eligible small
businesses can now claim the credit against
AMT, a game changer for these companies,
as well as for their pass-through shareholders
who had often been unable to use their share
of R&D credits due to AMT limitations.
“Eligible small businesses” include
corporations that are not publicly traded,
partnerships and sole proprietorships where
the average annual gross receipts for three
taxable years preceding the tax year in which
the credit is being claimed do not exceed
$50 million.
Permitting the use of the research credit
against AMT creates a new opportunity
for taxpayers to take the sting out of AMT
by enabling them to use it offset their tax
liability.
TREATMENT OF R&D CREDIT
FOR CERTAIN STARTUP
COMPANIES –
effective Jan. 1, 2016
The R&D credit is also now more beneficial
for many startup companies that previously
generated credits but couldn’t use them
because they weren’t paying regular
income tax.
Under the PATH Act, qualified small
businesses can now offset up to $250,000 of
their federal payroll taxes for up to five years.
“Qualified small businesses” are generally
businesses with (1) gross receipts in the
taxable year of less than $5 million and (2) no
gross receipts prior to the five taxable years
ending in the taxable year.
Read more 
BDO LIFE SCIENCES LETTER
9
CONTINUED FROM PAGE 7
CHANGES TO R&D TAX CREDIT
This enhancement to the credit can be an
important cash boost to startups—keeping
doors open for some of the sector’s most
disruptive players, and incentivizing further
investment in innovation.
CONCLUSION
R&D is at the heart of the life sciences
industry and critical to its continued
growth. The bread-and-butter activities
that take place during attempts to develop
new or improved drugs or techniques or
other components are prime targets for
the R&D tax credit, but they’re hardly the
only activities that qualify. Life sciences
companies attempting to develop or
even just to improve existing products or
production processes may also be eligible for
R&D tax credits. The cost of supplies used in
these processes can qualify as well, including
lab supplies, prototypes and experimental
production lots. And of course, costs related
to many types of clinical and other testing—
e.g., for product safety—can qualify as well.
For life sciences companies that have been
claiming the R&D credit for years, now is a
great time to make sure nothing is left on
the table, e.g., because people burdened
with other commitments default to SALY—
same-as-last-year—procedures. And for
startups and small businesses, the new
credit modifications offer opportunities
that can provide significant value. To take
full advantage of these new and expanded
opportunities and comply with all of the
sundry legal requirements not outlined
above, please consult with a tax advisor with
experience in R&D credits.
Chris Bard is the Practice Leader for
BDO’s Specialized Tax Services
Research and Development (R&D)
practice and Chairman of BDO International’s
Global R&D Center of Excellence. He can be
reached at [email protected].
Chai Hoang is a senior associate with
BDO’s R&D Tax Services practice. Chai
can be reached at [email protected].
Nina Medina is a senior associate with
BDO’s R&D Tax Services practice. Nina
can be reached at [email protected].
INVESTORS ANXIOUS,
BUT FUNDAMENTALS
STILL STRONG
Insights from J.P. Morgan Healthcare Conference
A sharp decline in the stock market in the first month of the year
following a turbulent 2015 largely dominated the discussion at this
year’s J.P. Morgan Healthcare conference in San Francisco,
traditionally viewed as the biggest healthcare investing event of
the year.
Drug pricing was an inescapable
focal point both inside and outside of
the conference, with many biotech
companies on the defensive about
the complexities driving up costs
and the negative impact that lower
prices can have on research and
development (R&D).
A 3.4 percent drop in the Nasdaq
Biotechnology Index—its worst
performance for the first day of the
conference since 2001—tempered much
of the customary exuberance exhibited
by company executives. Some analysts
said the negative tone reflected apathy
among investors who weren’t seeing
companies issue many market-moving
announcements leading up to the event,
but the general consensus is that while
fundamentals remain strong, perhaps
valuations had become a bit stretched.
The latest BDO Biotech Briefing reports
a similar story, with many of the driving
forces for industry growth in recent
years expected to continue. R&D
expenditures have been rising and are
projected to increase in the year ahead;
FDA approvals of new drugs were also
strong in 2015.
again soon. In early February, Abbott
Laboratories announced plans to
acquire diagnostic group Alere for
$5.8 billion. Stryker also revealed its
plans to buy medical supplier Sage for
$2.8 billion.
But the real action this year may be
found in partnerships. A number of big
life sciences players at the conference
appeared reluctant to pull the trigger on
deals, instead pointing to the benefits
of partnering with companies on drug
development. Johnson & Johnson’s CEO
Alex Gorsky made statements shrugging
off the idea of a large M&A deal, stating
a preference to partner with companies
to find the next blockbuster drug.
Genentech’s global head of partnering
issued similar comments about the
firm’s focus on “partnering”” with
like-minded people to discover new
medicines.
Tough headlines may dominate the
sector currently, but there still exists
a strong and promising environment
for drug development. While equity
markets may have cooled, biotechs
looking to fundraise this year are likely
to find success in partnerships and
acquisitions to fuel their pipeline.
While biotech stocks were off to a
volatile start in 2016, slowing deals,
there are indications that merger
& acquisition activity will pick up
Read more 
10
BDO LIFE SCIENCES LETTER
MARK YOUR CALENDAR…
CONTACT:
The following is a list of upcoming conferences and seminars from the leading
technology associations and business bureaus:
TIM CLACKETT
Los Angeles
310-557-8201 / [email protected]
MARCH 2016
March 14-17
BioProcess International Conference
& Exposition
Oakland Marriott City Center
Oakland, Calif.
March 15-16
13th Annual BIO Asia International
Conference
Grand Hyatt Tokyo
Tokyo, Japan
March 16-17
CBI Global Anti-Corruption and FCPA
Compliance Congress
Doubletree Center
Philadelphia
APRIL 2016
April 5-7
Bio-IT World Conference & Expo
Seaport World Trade Center
Boston
April 15
Crain’s ‘Business of’ Series: Life
Sciences
John Jay College of Criminal Justice
New York
April 25-27
BioTrinity
Hotel Novotel London West,
London, United Kingdom
SLADE FESTER
Silicon Valley
408-352-1951 / [email protected]
MAY 2016
HANK GALLIGAN
Boston
617-422-7521 / [email protected]
May 5-6
Drug Development Immersion Course
The Conference Center at Mercer
West Windsor, N.J.
PAUL HEISELMANN
Chicago
312-233-1876 / [email protected]
May 16-19
Biopharmaceutical Development &
Production Week
Grand Hyatt
AFTAB JAMIL
Silicon Valley
408-352-1999 / [email protected]
JUNE 2016
GLENN POMERANTZ
New York
212-885-8379 / [email protected]
June 6-9
2016 BIO International
Moscone Center
San Francisco
Shanghai, China
May 31-June 1
Boston CEO Conference
Four Seasons
Boston
RYAN STARKES
Woodbridge
732-734-1011 / [email protected]
DAVID YASUKOCHI
Orange County
714-913-2597 / [email protected]
April 20-22
Advances in Process Analytics and
Control Technology (APACT) 2016
Crowne Plaza Hotel
Chester, United Kingdom
BDO TECHNOLOGY & LIFE SCIENCES PRACTICE
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